Shopping For A Mortgage Rate? New Rules Consumers Need To Know

Pic Credit to Pilgmena Scalise

Shopping for a mortgage rate, there are some new rules consumers need to know. In the past interest rate shopping conversations for a California home loan were 10 second conversations.  “What’s your lowest 30 year fixed rate?”  An order taker loan originator would check their rate sheet and answer and than the consumer would hang up.

Today loan originators need to lengthen that conversation by advising consumers that each rate quote depends on several factors such as how much equity they have in their property, or how much they plan to use for a down payment,  the loan amount, and their credit score among other things.  A Loan Originator will engage the rate shopper with open ended questions and sell service as well.  Rate shoppers are looking for help, not just a number.

When it comes to quoting fees over the phone or in writing, this is where things have changed and the public needs to understand how the new rules of lending can affect them as well as the Loan Originator.  Have we heard of a situation where a California first time homebuyer goes in to sign their final escrow papers only to hear from the escrow officer that they have to come up with another $1500.00 to close thir escrow?  We all have.

First off, shame on the Loan Originator for not being at the closing table with their borrower.  A loan is a journey.  The borrowers and Loan Originator  work together during the ups and downs during the loan process and they should be together in the end when signing their final papers.  The borrowers are nervous and excited and need the Loan Originator there, it’s just good customer service.  Though sometimes fees can change at the last minute on the vendor side, but the lender fees should not.  There should be checkpoints put in place to ensure the fees haven’t changed and if there was a change to the loan request that affected fees, new disclosures could be issued.

Enter 2011.  Now when a Loan Originator issues a document entitled Good Faith Estimate to the consumer, the consumer has 10 days to accept these terms.  If the consumer accepts the terms prior to the 10 days expiring, than the Loan Originator  MUST give that consumer the interest rate listed on the Good Faith Estimate.  But what happens if during the 10 days the interest rate goes up by .25% or .50% and the rate never comes back down to the rate listed on the Goof Faith Estimate?  The Loan Originator must dig in their pocket to buy the rate down to the lower rate.  How much is that?  Generally per .25% in rate, it costs one full percent of the loan amount, which is generally what I charge on my deals.  So on a loan amount of $350,000, one percent would be $3,500.00.  I am working now for free.

So if I have to buy a rate down .50% on a $350,000 loan, that would be $7,000 out of my pocket when I’m only making $3,500 on the deal.  Who covers the additional shortage?  I do.  It’s for this reason, that I have to protect myself as an Originator to NOT quote the lowest rate and fees on a Good Faith Estimate.

How does this affect the rate shopper and consumer in general?  It means that rates and fees are going to be padded to protect the Loan Orginator from unforeseen interest rate fluctuations, and if you’ve been following interest rates at all, they are volatile.  Rates have gone up .50% in one day several times the past 3 months.

When I advise consumers of this new law, many have said “than just lock the interest rate right away to protect yourself from rates goiing up”.  That mentality too has changed.  Lending is back to a relation based business.  If I lock 5 loans and only 2 fund, that lender isn’t going to like me much and terminate our relationship for lack of follow through.  In today’s world with lending delays, low appraisals and various issues, locking a loan right away may not be wise.  Many Loan Originators are taking the stance to wait until they have an automated loan approval and an appraised value before locking a loan.  This will go a long way in maintaining a positive relationship with their loan investors as well as protecting their livelihood.

So moving forward, Loan Originators and their Realtor referral partners must work in concert together and understand how the new laws will affect California first time homebuyers, and move up buyers and more importantly educate the general public that shopping for interest rates and fees has changed and to be aware that lenders are padding rates and fees for quoting purposes but when it comes time to lock your interest rate, an honest Loan Originator will give you market rate and fees, which may be lower that what shows on your Good Faith Estimate.  The new California mortgage laws have forced loan originators to change on how we quote rates and fees and it’s going to take some getting used to for both the lenders and consumers.

If anyone has questions on this article, shopping for a mortgage rate, there are some new rules you need to know, please let me know by clicking here and letting me know your scenario!

Best,

Kevin Walton

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